BURGER FLIP

McDonald’s plans to revive its brand in China by getting out of the restaurant business

Obsession
China's Transition
Obsession
China's Transition

McDonald’s has a new recipe for its business in Asia—let someone else do the cooking.

The company has received more than six bids for its over 2,000 restaurants in mainland China and Hong Kong worth about $3 billion, Reuters reports, including one from China’s Sanpower Group.

The pending sale comes as McDonald’s is offloading operations in Japan, where it has almost 3,000 outlets, Taiwan, where it has over 400 outlets, and South Korea, where it has about 600.

Confusingly, the company also announced in March that it plans to open more than 1,500 stores in China, Hong Kong, and South Korea over the next five years.

Why is McDonald’s selling off restaurants and opening them at the same time? The answer lies in the magic of franchising.

For several years, McDonald’s has faced flagging sales around the world (though the recent addition of all-day breakfast gave them a boost). In the United States, consumers are abandoning the golden arches and moving towards healthier options or “fast-casual” food like Chipotle.

In China and other parts of Asia, it has even worse problems. A scandal over expired meat in 2014 shattered the company’s image as a safe food provider in China, a country where quality control remains poor. The company also occupies an awkward market position. Consumers once viewed the brand as an authentic Western dining experience, but their tastes have since evolved, and many favor more upscale restaurants instead. Competition from Asian fast food brands, meanwhile, has only grown fiercer.

“McDonald’s is in trouble in China because it doesn’t have the type of food or brand position that Chinese consumers want right now,” says Shaun Rein, founder of the China Market Research Group. “There’s a lot more competition from Chinese chains like Kung Fu or Japanese noodle chains like Ajisen, or from western brands like Starbucks. ”

Starting in 2014, growth slowed for several quarters, based on same-store sales, in the US and in “High Growth Markets” (formerly known as Asia Pacific, Middle East, and Africa).

Growth has rebounded slightly in recent quarters, thanks in part to initiatives like the all-day breakfast, which has been a huge hit in the US. But the changing macro climate McDonald’s faces in China will require bolder changes.

CEO Steve Easterbrook thinks the answer is franchising, in which a separate company (or individual) invests capital, takes over ownership, follows rules set by McDonald’s, and runs them independently from the company headquarters. In return, McDonald’s gets a share of the sales as a royalty (4% in the US), as well as regular rent payments. That makes the company less of a restauranteur than a broker between landlords, suppliers, and the actual store owners.

McDonald’s already franchises 80% of its restaurants worldwide, but only 44% of those in “high growth” markets that include China and South Korea. Just 20% of Chinese McDonald’s outlets were franchised by the end of 2014 (paywall).

The downside to franchising in China is that the company will lose control over things like intellectual property, food sourcing, and service quality. But good local partners could help the brand revive in Asia quicker than McDonald’s can do on its own, analysts say.

“In order to reinvigorate growth it needs a new business model for the country,” says Rein. “The best way to do that is to partner with folks who might know the China market a little better,” and have more money to spend.

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